Pension overhaul 'could cause fund withdrawals'

An overhaul of the design of UK pension saving being considered by the Treasury could lead to a mass withdrawal of funds, an industry figure has claimed.

Tom McPhail, head of retirement policy at Hargreaves Lansdown, suggested taxing pensions in the same way as Isas could lead to a "Northern Rock-style run on the pensions system".

The result of a review of pension saving will be revealed in the Budget.

Other options could benefit the savings of basic rate taxpayers.

Pensions explained

Click here to explore the chancellor's options to change the pension system, if he decides on an overhaul.

They include changing the method of tax relief, establishing an Isa-style system, altering allowances, and cutting salary sacrifice.

There could be winners and losers from such changes.

'Unstable'

Speculation suggests that Chancellor George Osborne might change the system to make pensions like Individual Savings Accounts (Isas).

Pension savers currently pay no tax on money they put into a pension, but they do pay tax on the money they take out. An Isa system would be the opposite, with income tax paid before the money was saved but tax-free when taken out.

Such a move would save the Treasury money but, according to Mr McPhail of pensions and investments manager Hargreaves Lansdown, this would cause huge instability.

"Investors don't trust politicians not to muck around with the pension system, with good reason," he said.

"An Isa-style reform, with tax relief being scrapped in favour of tax free withdrawals, would create the risk of a future Northern Rock-style run on the pension system and the UK stock market.

"Any hint of political interference in the future could result in billions of pounds being withdrawn overnight; it would be hugely unstable."

Incentive to save?

Former Pensions Minister Steve Webb, now director of policy at pensions provider Royal London, suggested that an Isa-style system would mean future pension savers would be at risk of politicians tinkering with this tax-free withdrawal, by having "another dip" at taxing pension savings.

Lord Adair Turner, a former chairman of the Pensions Commission, told the BBC on Thursday that an Isa-style system would not have any effect on the incentive to save into a pension, although it would bring forward the Treasury's tax income.

He said he was sympathetic to the idea of single rate of tax relief, suggesting it was "the direction in which we should head".

At the moment, basic-rate taxpayers who pay into a pension get 20% tax relief. Higher-rate taxpayers get 40% - and top-rate taxpayers get 45%.

Higher-rate tax relief costs the Treasury some £7bn a year, and clearly favours the well-off. A flat-rate has the potential to benefit basic-rate taxpayers and hit higher-rate taxpayers, depending on the level at which it is set.

A Treasury spokesman said all options were still being considered - including retaining the current system.

"The government launched a wide-ranging consultation into pensions tax relief last summer. We have not decided on whether or how to reform the system and are considering all options, including retaining the current system. This consultation is now closed and we will respond at the Budget," he said.